Want to Start a Business? Legal Considerations to Make Before Starting a Business in Japan
By: Trevor A. Mason
In today’s global economy, Japan represents a premier economy consistently falling within the top three of the nominal GDP in the world.[1] Many different features make Japan an attractive, innovative environment for doing business, including “R&D capabilities, personnel and well developed laws, such as intellectual property rights.”[2] Such a robust economy and attractive features make Japan the place to go for entrepreneurs from other countries starting companies in Japan.[3] So then, if you are not from Japan how does one go about starting a business in Japan? Japan is ranked 114th in “ease of doing business.”[4] Put into perspective, in 2018, Japan obtained a 75.65 rating in ease of business, making it fall within the top twenty economies.[5] However, this rating drastically fell from a rating of 78.6 in 2013.[6] In general, it has been said that creating business relationships in Japan is built over time.[7] In competitiveness, Japan is ranked sixth in the World, and second among Asian countries.[8] Therefore, being knowledgeable of Japanese law regulating businesses will be important for the success of any entrepreneur.
What is the first step to take? Much like starting a business entity anywhere you want to get your business incorporated. Japan offers many different entities and structures that a person from another country looking to start a corporation in Japan.[9] These structures include: “Corporation (“KK company”); . . . Limited liability company (“YK company”); . . . Registration of the foreign corporation as a branch; . . . Representative office; and . . . [and] General and silent partnerships.”[10] The kabushiki kaisha, otherwise known in English as a KK Company, is the most popular of these forms.[11] The KK only takes about four weeks to create with a minimum capital of ten million yen (approximately 90 million in US Dollars); and requires the appointment of a promoter, minimum of three directors, and a statutory auditor.[12] This form of company is most popular in use as a parent company where the KK Company can escape liability for the legal obligations of its subsidiaries.[13] The other form of company that is popular is LLC equivalent, the yugen kaisha, or YK Company in English, for its ease in formation and minimal amount of capital needed.[14] Partnerships in Japan are rarely utilized as they are structures that are associated with much higher liability.[15] If a partnership is sought after it can take three different forms: (1) General partnership; (2) Limited Partnerships (yugensekinin kumiai); and (3) Silent Partnerships (tokumei kumiai).[16]
One of the biggest issues of conducting business in Japan is not the process of forming the business, but obtaining the requisite visa and residency needed to engage in business activity in Japan. If you wish to live in Japan and become a partner or director of the business, you will need to obtain an “Investor/Business Manage Visa.”[17] An Investor/Business Manager work status allows for various activities necessary to successfully operate a business.[18] However, if a foreign company wishes to operate the business and not have someone with residency in the country there are options for this course of action. They include obtaining a Representative office,[19] Branch office,[20] or creating a Subsidiary company.[21]
Regardless of whether you are a foreign entity or non-native person conducting business in Japan, all business activities conducted in Japan will be subject to taxes within the country.[22] When a Japanese corporation or branch office is established in Japan a “tax notification pertaining to start-up must be submitted to tax authorities within a prescribed period after establishment.” The type of income subject to national taxation will be income from business conducted in Japan or from the utilization, holding, sale, or disposal of assets situated in Japan and other income sources within Japan; income from businesses that consist primarily of providing personal services performed in Japan; and dividends or distribution of surpluses and profits from securities investment trusts (excluding bond investment trusts) received from domestic corporations etc.”[23] Another tax entrepreneurs should be aware of is a consumption tax. This tax is similar to a “value-added tax” in the European Union and is “imposed on the transfer/lease of assets in Japan and services in Japan offered by enterprises.”[24]
One positive note is that Japan encourages foreign business investment as it generally has few restrictions on investment.[25] Additionally, many incentives are offered to foreign investors in special economic zones that include types of tax deductions and reduced rents.[26] Therefore, those looking to find a thriving market to build a business, Japan can be your next stop.
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[1] See Business Start-up Costs in Japan, CompanyFormationJapan.com (last updated Mar. 18, 2019), https://www.companyformationjapan.com/business-start-up-costs-in-japan [hereinafter Start-up Costs] (Stating Japan had the second largest nominal GDP in 2018); Top 10 challenges of doing business in Japan, TMF Group, https://www.tmf-group.com/en/news-insights/business-culture/top-challenges-japan/ (last visited Oct. 6, 2019) [hereinafter Top 10 Challenges] (stating Japan is the third largest economy).
[2] Top 10 Challenges, supra note 1.
[3] See Start-up Costs, supra note 1.
[4] Top 10 Challenges, supra note 1.
[5] Ease of doing business in Japan from 2013 to 2018, statista, https://www.statista.com/statistics/885351/japan-ease-of-doing-business/ (last visited Oct. 6, 2019).
[6] Id.
[7] See Legal & Regulatory Issues, EU Business in Japan, https://www.eubusinessinjapan.eu/issues/legal-regulatory-issues (last visited Oct. 6, 2019).
[8] Shinsei Consulting, Thinking About Starting a Business in Japan: Things to Consider When You Want to Start Your Business in Japan as a non-Japanese, Founder’s Guide (Nov. 18, 2015), http://foundersguide.com/foreign-guide-how-to-start-business-japan/.
[9] See Baker & McKenzie, Doing Business in Japan, 6 Cornell Univ. ILR Sch. 1, 5 (2005). See also Shinsei Consulting, supra note 8.
[10] Id.
[11] Id. at 6.
[12] Id.
[13] See id.
[14] See Shinsei Consulting, supra note 8; Baker & McKenzie, supra note 9, at 7. A YK only requires three million yen (approx. 26,500 US Dollars) and less filing requirements then a KK, including the need for only one director. Id. at 7-8.
[15]See Shinsei Consulting, supra note 8.
[16] Baker & McKenzie, supra note 9, at 9.
[17] See Shinsei Consulting, supra note 8.
[18] See JETRO, Laws & regulations on Setting Up Business in Japan, invest japan 20 (Oct. 2012), https://www.jetro.go.jp/en/invest/qa/setting_up/pdf/settingup_201210.pdf (Japan law allows for a person with an Investor/Business manager work status to perform “(1) Activities to invest in, commence and operate or manage a business in Japan. (2) Activities to invest in an existing business in Japan and operate or manage said business. (3) Activities to operate or manage a business in Japan on behalf of the foreign nationals or foreign corporations that have invested in and commenced that business (e.g. the chief executive officer or representative director responsible for that business, a director or department manager employed in the management of that business under the chief executive officer or representative director). (4) Activities to operate or manage a business in Japan on behalf of the foreign nationals or foreign corporations that have invested in an existing business in Japan.”).
[19] Id. (“The establishment of representative offices doesn’t require registration, but they cannot open bank accounts by the name.”).
[20] Id. (“Having branch in Japan requires registration.”).
[21] Id. (“The procedures and conditions of establishing a subsidiary company is as same as establishing a Japanese company.”).
[22] See JETRO, supra note 18, at 30.
[23] Baker & McKenzie, supra note 9, at 16-17.
[24] Id. at 18.
[25] See Understanding Business Laws in Japan, Asialink Business, https://asialinkbusiness.com.au/japan/business-practicalities-in-japan/understanding-business-laws-in-japan?doNothing=1 (last visited Oct. 7, 2019).
[26] See id.